By THE EDITORIAL BOARD
India’s once booming economy is sliding into a deep slump.
The country grew just 4.4 percent this summer, a far cry from the 7.7
percent average for the past decade. Its currency, the rupee, has
tumbled 16 percent against the dollar in the last three months. And
analysts expect things to get even worse in the coming months.
Like Indonesia, Brazil and other developing countries,
India has been hurt as investors have moved money to the United States
to take advantage of the prospect of higher interest rates. But most of
India’s biggest problems — like its high inflation, which was nearly 5.8
percent in July and has been rising partly because of the falling rupee
— have domestic causes. Until the coalition government led by Prime
Minister Manmohan Singh reforms the country’s economy, India will fall
far short of its potential.
During the global financial boom of the mid-2000s, investors
indiscriminately dumped cash into fast-growing countries and India’s
shortcomings were easily overlooked. The financial crisis forced
investors to pay more attention to fundamental problems in emerging
markets. Analysts and business executives say the country has become
even less hospitable in recent years. In the nine years that the
coalition government has been in power, several ministers have resigned in corruption scandals; large infrastructure projects have been delayed by mismanagement; the government’s budget deficit has ballooned, thanks to wasteful spending like subsidies for diesel fuel; and politics have thwarted reforms in labor and education.
Mr. Singh has been an ineffectual leader
without much authority. The real power is held by his political patron,
Sonia Gandhi, who leads the Indian National Congress Party, which has
expressed little concern for the country’s ailing economy.
Sadly, most analysts expect Ms. Gandhi and Mr. Singh to make no
politically difficult changes — like privatizing bloated state-owned
enterprises or easing counterproductive regulations and delays on public
infrastructure projects — until after national elections next year.
As the economy slows, India’s poor suffer most. Many have lost jobs in hard-hit sectors like construction and manufacturing. They are also seeing their meager incomes eroded by rising food costs. One change that would help is for government to provide welfare payments directly
to families instead of funneling subsidized food grains, fuel and other
commodities through corrupt officials who siphon off up to 60 percent of the benefits. In Brazil and Mexico, direct transfers to the poor have helped reduce poverty and cut down on corruption and waste.
The new governor of India’s central bank, Raghuram Rajan, a respected
economist, can also help by pushing through delayed reforms to make the
country’s financial industry more competitive by, for instance, granting
licenses to new banks. But unlike the Federal Reserve, the Reserve Bank
of India is subject to significant political meddling, which could
limit how far Mr. Rajan can go.